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Tokyo building boom causes debt fatigue as Sumitomo yields rise

by Katsuyo Kuwako

Bloomberg

Sumitomo Realty & Development Co. is forecasting a third-straight year of record operating income as “Abenomics,” the name give to Prime Minister Shinzo Abe’s economic policies, spurs a property market boom. That doesn’t mean investors have unlimited appetite for its debt.

The nation’s third-largest developer by market value has offered ¥330 billion in notes since 2013, accounting for 28.5 percent of issuance by property firms, data compiled by Bloomberg show. Its bonds due June 2025 pay an extra yield of 54 basis points over the sovereign, compared with 48 for similar-maturity paper of Nomura Real Estate Holdings Inc., whose local debt score is one level lower.

Sumitomo Realty is forecasting a 4.9 percent increase in operating earnings after Abe’s stimulus measures helped cut Tokyo office vacancies to the least since 2008 in July. Its debt-fueled expansion was one success story even as the Bank of Japan’s bond-buying stimulus failed to prevent the economy contracting last quarter.

“There’s a limit to how much exposure investors can have in the real estate sector,” said Kenji Serizawa, a credit analyst in Tokyo at Daiwa Securities Group Inc., the country’s second-largest brokerage. “There aren’t that many Japanese issues that offer 1 percent for 10 years, so that’s appealing as an investment, but the problem is it’s already sold a lot of bonds.”

The coupon on Sumitomo Realty’s 10-year notes jumped to 0.992 percent at an offering in June from 0.67 percent for 2025 debt issued in January, Bloomberg-compiled data show.

Nomura Real Estate, with the fifth-lowest investment grade of A from Japan Credit Rating Agency Ltd. versus Sumitomo’s A+ score, paid 0.924 percent for 10-year bonds sold in May.

Tokyo-based Sumitomo Realty had a debt to equity ratio of 346 percent as of June 30, three times the level of Mitsui Fudosan Co., Japan’s second-biggest developer.

“The company has large unrealized gains on its property holdings,” Daiwa’s Serizawa wrote in a report dated July 17. “The debt to equity ratio is high when compared with other companies, but if you consider the unrealized gains as part of its potential assets, it’s in line with other firms.”

Sumitomo Realty’s shares have gained about 11 percent this year, compared with a 25 percent increase for Nomura Real Estate.

Sumitomo Realty declined to comment on its debt levels and future issuance plans.

The company made 63 percent of its operating income from the rental business in the year ended March 31, the highest ratio among Japan’s top developers after Mitsubishi Estate Co., the country’s largest property company, according to Daiwa data. Renting is a stable driver of income, the brokerage said.

Sumitomo Realty owns and manages more than 200 office buildings in central Tokyo, according to spokesman Toshiya Suzuki. The firm is also increasing its condominium sales, with it forecast to supply the second-most units in Japan this fiscal year, according to the Real Estate Economic Institute Co.

The property company’s debt is rising because “it has a lot of projects under development, and its expenses are increasing,” said Hiroki Kawashima, an analyst at SMBC Nikko Securities Inc. in Tokyo. “It’s in the process of coming up with stable sources of profit.”